Daily Stock Pick for May 19, 2023

Think of the last time you visited a website full of bright and colorful images. Only – it loaded way too slowly (despite your high-speed broadband), causing you to click off the page in frustration.

What happened? Likely, the offending website decided to cheap out and not use a Content Delivery Network (CDN). A CDN is a geographically distributed group of servers that caches content closer to end users like yourself so it can load faster. So even if the website’s main host server is on the other side of the world, the CDN may have a server just a couple hundred miles away that can serve you the cached content.

And in an impatient world where content is king and every click matters, it should be no surprise to learn that CDNs is a fast-growing market, estimated to surge nearly six-fold from just under $20 billion in 2022 to $106 billion in 2032.

Today’s daily stock pick is a growth stock that is the undisputed market leader in this expanding market. Yet, after lowering forward guidance in its recent earnings report, its stock took a massive beating – creating an opportunity for investors willing to take on a bit of added risk.

Cloudflare, Inc. (NET)

Cloudflare is the undisputed market leader in the CDN market, with almost 20% of all websites using its services – giving it an estimated market share of about 75%. By comparison, Amazon’s CloudFront CDN service only has an estimated market share of about 6%.

Pull up Cloudflare’s stock chart, though, and one thing is unmissable – a massive dip in its share price starting April 27, the day it released its first-quarter earnings. The dip had nothing to do with the results themselves – which came in largely above consensus, especially for bottom-line numbers.

No, the drop was due to the company’s forward guidance, where it now targets ~$305 million in revenue for 2Q2023 (vs. consensus of $320 million) and ~$1.28 billion for FY2023 (vs. consensus at $1.33 billion).

The severe drop in stock price seems out of touch with the downward guidance. Plus, when you look at the longer-term trend in Cloudflare’s stock price, you will see that it now stands at levels last seen in May 2022 (and October 2020).

Considering that Cloudflare’s bottom-line earnings are still way above the consensus ($0.35 expected for FY2023 vs consensus of $0.16), this shows that this may be a good time to bet on this stock. The company now has 85 big customers doing over $1 million in annual sales, compared to just 17 at the end of 2019.

Of course, macroeconomic headwinds – aka all the recession talk – has been spooking investors, and no doubt affecting Cloudflare’s stock price.

But all things considered, if you have some tolerance for the risks involved in growth stocks, Cloudflare might prove to be a timely addition to your portfolio – especially with the tech stock recovery making tech stocks more and more expensive these days.